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Private debt could be deducted from stimulus payments

Stimulus Checks
Posted at 9:34 AM, Mar 12, 2021
and last updated 2021-03-12 09:34:53-05

More help is on the way in the form of checks for Americans.

The latest COVID-19 relief bill means many people will get somewhere between $1,400 and $5,600, depending on how much they make and the number of children in the home.

There’s also an important change– all dependents, including college students and disabled family members, are eligible for the additional payment.

While the income threshold is lower, about 90% of households are still eligible for the money.

“Which may incentivize some folks to adjust their income in 2021 because you are going to have that opportunity to claim a credit on your next tax return if you receive a partial payment or no payment because you have too much income,” said Garrett Watson, Senior Policy Analyst at the Tax Foundation.

If you're not getting a check now, but you're close to the income cutoff, you could contribute more to an IRA or 401K to drop your adjusted income and then get the payment when you file your 2021 taxes.

Another big change in the third stimulus payment deals with debt. Again, no back taxes, child support or other government debt will be deducted, but private debt could be. That would affect people who have a judgment against them for some unpaid debt and the creditor has access to the bank information where the stimulus money is going.

“So, that is one thing for folks to take a look at and keep an eye out when they are thinking about where this payment might be going, especially if you have it in direct deposit to an account that might be being looked at by creditors,” said Watson.

Banks could also deduct any overdraft fees from stimulus money. Many waived them in December. You'll want to check with your bank.

Separate from the stimulus payments, a different part of the bill increased the child tax credit for next year to 3,000 or $3,600, depending on how old the child is.

The IRS will essentially start loaning the money this year in the form of monthly payments.

The system will be a lot more complicated and require more information from people in advance about what they may qualify for.

“One risk here is that households end up having incorrect information or estimate these various factors incorrectly and get an overpayment and end up having a surprise tax bill during the next tax season, because they got too much of an advance payment,” said Watson.

There are only limited protections for families who make errors and get too much money. So, it could be worth waiting until next tax season to see if you qualify.